Via Kay McDonald I was led to some data for the per-acre price of Iowa farmland, as well as annual rental rates for the same. I made the graph above for the price-to-rent ratio.
Clearly the food price boom of recent years has led to a considerable increase in land rents, but an even larger increase in land prices - hence the increase in the ratios above. The question is - is this now getting bubbly? The ratio for the pastureland in particular looks extraordinarily high - 1.7% is the implied annual return on investment, which compares very unfavorably to 10 year Treasury yields - seemingly a far less volatile investment. Even the cropland is only comparable to the 10 year treasury yield.
Either farmers and investors are correctly betting that food prices, and thus farm incomes, will be a lot higher in the future - not a crazy theory - or these acres are overpriced. In particular I wonder what supports the much higher price/rent ratio for the pastureland - is there some sense that it might be converted to more valuable cropland in future?
Stuart:
ReplyDeleteI think that pastureland price bubble has more to do with what is happening in the Southwest, with the drought. More and more Texas ranchers are either (1) selling off chunks of their herds; (2) moving their herds to other states (such as Iowa) to feed them; or (3) paying $250/ton for hay. All of these drive up the prices in wet states like Iowa.
If you compared pastureland to hay prices, or to rainfall in Texas, you might get an interesting result.
Joe: Do you have a reference to Texas ranchers moving stock? Thanks, Don
ReplyDeleteFixed Carbon, Google is your friend. Colorado is mentioned. http://www.upi.com/Business_News/2011/06/16/Ranches-hit-by-drought-take-stock-in-Texas/UPI-75711308254057/
ReplyDeleteStuart,
ReplyDeleteSince a few years it is possible for western companies to acquire farm land in former Soviet Union. Some publish detailed yearly reports, see for example Black Earth Farming.
http://blackearthfarming.com/files/BEF%202Q%20Report%202011.pdf
It would be interesting to compare the price of land and the harvest to the ones in US.
Iowa now gets 20% of its electricity just from wind power. Iowa farmers are able to earn money on the side from hosting wind turbines on their land. It can be quite a lot of money, amounting to a second income from the same land. That "second farm" might be contributing to Iowa farm prices.
ReplyDeleteI think you also need to factor in the increase in land rent to the popularity of grass feed and free range beef. Those prices have gone up in direct relation ship with the land rents. They take a lot of land to graze on.
ReplyDeleteI would guess that there just isn't much pasture land in Iowa, and that not too many people are renting pasture. Therefore, the rental price is low because there aren't too many people renting pasture, but all land prices are high, so farms with pasture also sell at a high price. If crop land sells for $8000 an acre, but cash rent is at $300, whereas pasture land sells at $2000, but pasture rents are $30, you about have that chart.
ReplyDelete